28) Conflicts arise in the mutual funds industry because ________ cannot effectively monitor
________.
A) investment advisers; directors
B) directors; shareholders
C) shareholders; investment advisers
D) investment advisers; stocks that will outperform the overall market
29) Late trading is the practice of allowing orders received ________ to trade at the ________
net asset value.
A) before 4:00 PM; 4:00 PM
B) after 4:00 PM; 4:00 PM
C) after 4:00 PM; next day’s
D) before 4:00 PM; previous day’s
30) Market timing
A) takes advantage of time differences between the east and west coasts of the United States.
B) takes advantage of arbitrage opportunities in foreign stocks.
C) takes advantage of the time lag between the receipt and execution of orders.
D) is discouraged by the stiff fees mutual funds charge every investor for buying and then selling
shares on the same day.
31) Late trading and market timing
A) allow large, favored investors in a mutual fund to profit at the expense of other investors in
the fund.
B) hurt ordinary investors by increasing the number of fund shares and diluting the fund’s net
asset value.
C) are both A and B of the above.
D) are none of the above.
32) Which of the following is not a proposal to deal with abuses in the mutual fund industry?
A) Strictly enforce the 4:00 PM net asset value rule.
B) Make redemption fees mandatory.
C) Disclose compensation arrangements for investment advisers.
D) Increase the number of dependent directors.
33) ________ means the investors can convert their investment into cash quickly at a low cost.
A) Liquidity intermediation
B) Denomination intermediation
C) Diversification
D) Managerial expertise
34) At the start of 2014, one share of Berkshire Hathaway’s A-shares was trading at over
$150,000. ________ in an mutual fund gives a small investor access to these shares.
A) Liquidity intermediation
B) Denomination intermediation
C) Diversification
D) Managerial expertise
35) Mutual fund companies frequently offer a number of separate mutual funds called ________.
A) indexes
B) complexes
C) components
D) actuaries
36) Equity funds can be placed in which class according to the Investment Company Institute?
A) Capital appreciation funds
B) World funds
C) Total return funds
D) All of the above
37) Government bonds are essentially default risk-free, ________ returns.
A) and will yield high
B) and will yield the highest
C) but will have relatively low
D) none of the above
38) ________ bonds combine stocks into one fund.
A) Hybrid
B) Money market
C) Municipal
D) Equity
39) All ________ are open-end investment funds that invest only in money market securities.
A) Stock funds
B) Bond funds
C) Money market mutual funds
D) all of the above
1) The larger the number of shares traded in a stock transaction, the lower the transaction costs
per share.
2) The increase in the number of defined contribution pension funds has slowed the growth of
mutual funds.
3) Mutual funds accounted for $5.3 trillion, or 27%, of the $19.5 trillion U.S. retirement market
at the beginning of 2013.
4) Among the investors in mutual funds, only about 25% cite preparing for retirement as one of
their main reasons for holding shares.
5) Open-end mutual funds are more common than closed-end funds.
6) The net asset value of a mutual fund is the average market price of the stocks, bonds, and
other assets the fund owns.
7) A mutual fund’s board of directors picks the securities that will be held and makes buy and
sell decisions.
8) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its
customers an account from which funds could be taken to purchase securities and into which
funds could be deposited when securities were sold.
9) A deferred load is a fee charged when shares in a mutual fund are redeemed.
10) Several academic research studies show that investors earn higher returns by investing in
mutual funds that charge higher fees.
11) Hedge funds have a minimum investment requirement of between $100,000 and $20 million,
with the typical minimum investment being $1 million.
11
12) SEC research suggests that about three-fourths of mutual funds let privileged shareholders
engage in market timing.
13) One factor explaining the rapid growth in mutual funds is that they are financial
intermediaries that are not regulated by the federal government.
14) Whether a fund is organized as a closed- or an open-end fund, is will have the same basic
organizational structure.
15) The primary purpose of loads is to provide compensation for sales brokers.
16) Mutual funds are regulated under four federal laws designed to protect investors.
1) What benefits do mutual funds offer investors?
Topic: Chapter 20.2 Benefits of Mutual Funds
Question Status: Previous Edition
2) How is a mutual fund’s net asset value calculated?
Topic: Chapter 20.3 Mutual Fund Structure
Question Status: Previous Edition
3) How did money market mutual funds originate and why did they become especially popular in
the late 1970s and early 1980s?
Topic: Chapter 20.1 The Growth of Mutual Funds
Question Status: Previous Edition
4) How does the governance structure of mutual funds lead to asymmetric information and
conflicts of interest?
Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry
Question Status: Previous Edition
12
5) Describe the practices of late trading and market timing and explain how these practices harm
a mutual fund’s shareholders.
Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry
Question Status: Previous Edition
6) Discuss the proposals that have been made to reduce the conflict of interest abuses in the
mutual funds industry.
Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry
Question Status: Previous Edition
7) How is an index fund different from the other four primary investment objective classes for
mutual funds?
Topic: Chapter 20.4 Investment Objective Classes
Question Status: New Question
8) Discuss the four primary classes of mutual funds available to investors.
Topic: Chapter 20.4 Investment Objective Classes
Question Status: Previous Edition
9) What are the five benefits of mutual funds?
Topic: Chapter 20.2 Benefits of Mutual Funds
Question Status: New Question
10) What is the difference between an open-end and a closed-end mutual fund?
Topic: Chapter 20.3 Mutual Fund Structure
Question Status: New Question
11) What are two key differences between a traditional mutual fund and a hedge fund?
Topic: Chapter 20.7 Hedge Funds
Question Status: New Question